SOLUTIONS MANUAL for Accounting for Decision Making and Control 9th Edition by Jerold Zimmerman by AllAcademicsCampus

TEST BANK TEST BANK

SOLUTIONS TO PROBLEMS AND CASES CHAPTER 1 INTRODUCTION P 1–1:

Solution to MBA Students (10 minutes) [Using accounting information for decision making and control]

Together the two observations highlight the extremes in the trade-offs of using accounting information for decision and control. In the first case, there is more analysis of opportunity costs that are hard to capture with typical accounting information. In the second case, there is less intended interest in opportunity cost and greater emphasis on control. P 1–2:

Solution to One Cost System Isn't Enough (15 minutes) [Economic Darwinism]

The first part of the quote describes the tension (and conflict) that arises when a single accounting system is used for multiple purposes. This part of the statement is an accurate description of practice. However, the quote has a couple of problems, including: •While the quote describes the costs of using a single system ("a single system ... can't perform important managerial functions adequately"), the quote does not describe the benefits derived from using a single system (lower bookkeeping costs, a single audit, less confusion). •Because the quote ignores the benefits of a single system, it ignores the concept of economic Darwinism. It does not address the question of how surviving (successful) companies can compete if a single system "can't perform important managerial functions adequately." •Also, the quote assumes that managers are bound to their internal accounting systems, that no other alternative information sources are available. Often managers develop their own ad hoc, "off-line" information systems for decision making. These systems include spreadsheets, informal observation, and "walking around." P 1–3:

Solution to U.S. and Japanese Tax Laws (15 minutes) [Influence of conflicting demands on cost systems]

The internal accounting system supports multiple uses, including financial reporting, taxes, contracting (debt and management compensation), internal decision making, and internal control. Because multiple purposes are served, trade-offs must be made among the competing demands. When more emphasis is placed on one purpose (taxes), less consideration can be given to other uses (internal decision making and Chapter 1 Instructor’s Manual, Accounting for Decision Making and Control

control). By linking taxes to external reporting, Japanese firms’ financial reports will be based on accounting procedures that give more weight to tax considerations. In the U.S., companies can keep two sets of books, one for taxes and the other for financial reporting. Thus, in the U.S., there is more of a decoupling of taxes and everything else. Except for the additional bookkeeping costs of producing the two separate sets of reports, tax considerations are predicted to have less influence on the choice of internal (and thus external) accounting procedures in the U.S. than in Japan. The question is raised as to why firms use the same accounting procedures for internal reports as they do for external reports. Or for that matter, why do tax laws and external financial reporting considerations have any effect on internal accounting procedures? Why don’t firms maintain multiple sets of accounts, one for each purpose (e.g., financial reporting, internal decision making, and internal control)? Clearly there are additional bookkeeping costs for maintaining multiple sets of accounts. But also, there are confusion costs and, in many instances, firms explicitly link senior executive compensation to externally reported financial statements. Such explicit linkage of executive pay to externally reported net income presumably exists to control agency costs between management and shareholders. Once senior management performance and rewards are linked to external reports, the internal reporting system will become linked to the external reports and basically less consideration will be given to choosing accounting procedures that aid in internal decision making and internal control. In Japan, the firm’s accounting systems are less likely to be used for internal uses (decision making and control) than in the U.S. Because they cannot rely as much on their accounting systems for internal uses (because more weight is placed on using accounting procedures to reduce taxes), Japanese managers are more likely to use non-accountingbased systems for internal decision making and control. P 1-4:

Solution to Using Accounting for Planning (15 minutes) [Usefulness of historical costs]

Historical costs are of limited use in making planning decisions in a rapidly changing environment. With changing products, processes and prices, the historical costs are inadequate approximations of the opportunity costs of using resources. Historical costs may, however, be useful for control purposes, as they provide information about the activities of managers and can be used as performance measures to evaluate managers.

The purpose of accounting systems is to provide information for planning purposes and control. Although historical costs are not generally appropriate for planning purposes, additional measures are costly to make. An accounting system should include additional measures if the benefits of improved decision making are greater than the costs of the additional information.

Chapter 1 1-2

P 1–5:

Solution to Budgeting (15 minutes) [Trade-off between decision making and control]

In this firm, the bonus is based on meeting the budget. Two incentives exist: sales people will under-forecast future sales and they have little incentive to sell more than the budget. This firm tries to use the budget for two functions: decision making and control. In deciding on next year’s production plans, sales peoples’ forecasts of future sales are important. However, these same forecasts (after revision by supervisors) are used as part of the compensation scheme to motivate the sales people to achieve their goals. By using the budget (forecasts) as part of the control system, the firm gives up some of the budget’s usefulness as a decision making tool to set production plans. While senior managers might recognize that the sales people’s forecasts are low, they don’t know exactly how low. This introduces more uncertainty into planning for next year’s production. P 1-6: a.

Solution to Golf Specialties (20 minutes) [Average versus variable cost of an incremental order] Given that the variable cost per head cover is 1.10 euros, the fixed cost per week is: AC = FC / Q + VC

3.10 = FC/600 + 1.10

3.50 = FC/500 + 1.10

FC = 1,200 euros

The change in total cost if the 100 unit Kojo offer is accepted is: 600 × 3.10 euros – 500 × 3.50 euros = 110 euros Or, each head cover has variable cost of 1.10 euro. Since Kojo is willing to pay 2 euros per head cover or 200 euros for 100 covers, by accepting this order GS makes 90 euros a week. Therefore, GS should accept Kojo’s offer if these are all the relevant facts.

GS should consider the following non-quantitative factors: • What prevents Kojo from reselling the head covers back to dealers in Europe at prices below GS’s current price of 4.25 euros? • If GS sells the head covers to Kojo at 2 euros, what prevents GS’s European customers from learning of this special deal and demand similar price concessions. In other words, why do we expect to be able to implement this price discrimination strategy?

Chapter 1 Instructor’s Manual, Accounting for Decision Making and Control

• •

P 1–7:

Will Kojo purchase other GS products and import them to Japan? What is Kojo’s credit worthiness and will they pay for the head covers upon taking delivery? Solution to Parkview Hospital (25 minutes) [Changes in the environment cause accounting system changes]

Parkview’s accounting system was probably adequate 10 years ago. It faced little competition and had little incentive to have detailed cost and revenue data at the clinical levels.

With increased pressure to reduce costs, Parkview management wants detailed cost and revenue data at the clinic level to help identify units with excess revenues or deficits. This would help guide their decisions as to how to respond to the $3.2 million shortfall. The accounting system doesn’t provide as much help as management would like.

The question of changing the accounting system should be approached as a costbenefit decision. What will such changes cost, how long will they take to implement, and what benefits are derived? While it is tempting to say more accurate tracking of costs and benefits allows better decision making, changing the accounting system, including all the data processing changes that are likely necessary, usually is a very costly and time consuming process. Often special studies based on approximations of clinical department costs and revenues might prove to be faster and cheaper than waiting to revamp the accounting system. Notice the change in competition in the health insurance market caused by Trans Insurance’s entry prompted a series of changes in Parkview, including a reexamination of its accounting system.

P 1–8: a.

Solution to Montana Pen (25 minutes) [Incremental cost of outsourcing] The average cost information given in the problem does not tell us what 400 clips cost. Like in the Vortec example from the chapter, the incremental cost of the 400 clips must be estimated from the following: Change in total cos t B185  1200 − B212.5  800 = = B130/clip Change in volume 1, 200 − 800

At the current volume of 1,200 clips, the total cost is B222,000 (B185 × 1,200). If 400 clips are outsourced, reducing in-house volume to 800, the total cost falls to B170,000 (B212.5 × 800). Hence, total cost falls B52,000 (B222,000 Chapter 1 1-4

B170,000), or B130 per clip (B52,000 ÷ 400). Therefore, if 400 clips are outsourced to the Chinese company, Montana saves B130 per clip, but must pay the Chinese firm 136 per clip. Therefore, based solely on the cost data presented in the problem, do not outsource the gold clips. b.

There are a number of additional factors that must be considered besides just the costs: i.

How does the quality of the Chinese clips compare to Montana’s quality? If it is significantly higher, then it might be worth paying six Baht more per clip (approximately $0.10). What about delivery reliability? Is the Chinese firm more or less reliable than producing the clips in-house?

ii.

What alternative use can be made of the manufacturing capacity of the 400 clips freed up if they are outsourced? Is the Bangkok plant’s manufacturing capacity constrained because there are not enough skilled goldsmiths or because of space or equipment? If so, by outsourcing the 400 clips to the Chinese, what other pen parts can these goldsmiths manufacture?

iii.

What long-term benefits are created by developing a business relation with this Chinese firm? For example, might this Chinese firm become a possible business partner or useful in opening a Chinese pen factory? Will Montana’s management learn anything new about business dealings with Chinese firms from outsourcing these clips? Will purchasing these clips in China help Montana sell more pens in China?

Chapter 1 Instructor’s Manual, Accounting for Decision Making and Control

CHAPTER 2 THE NATURE OF COSTS P 2-1:

Solution to Darien Industries (10 minutes) [Relevant costs and benefits] Current cafeteria income Sales Variable costs (40% × 12,000) Fixed costs Operating income Vending machine income Sales (12,000 × 1.4) Darien's share of sales (.16 × $16,800) Increase in operating income

P 2-2:

$12,000 (4,800) (4,700) $2,500 $16,800 2,688 $ 188

Negative Opportunity Costs (10 minutes) [Opportunity cost]

Yes, when the most valuable alternative to a decision is a net cash outflow that would have occurred is now eliminated. The opportunity cost of that decision is negative (an opportunity benefit). For example, suppose you own a house with an in-ground swimming pool you no longer use or want. To dig up the pool and fill in the hole costs $3,000. You sell the house instead and the new owner wants the pool. By selling the house, you avoid removing the pool and you save $3,000. The decision to sell the house includes an opportunity benefit (a negative opportunity cost) of $3,000. P 2-3:

Solution to NPR (10 minutes) [Opportunity cost of radio listeners]

The quoted passage ignores the opportunity cost of listeners’ having to forego normal programming for on-air pledges. While such fundraising campaigns may have a low out-of-pocket cost to NPR, if they were to consider the listeners’ opportunity cost, such campaigns may be quite costly.

Chapter 2 Instructor’s Manual, Accounting for Decision Making and Control

P 2-4:

Solution to Silky Smooth Lotions (15 minutes) [Break even with multiple products]

Given that current production and sales are: 2,000, 4,000, and 1,000 cases of 4, 8, and 12 ounce bottles, construct of lotion bundle to consist of 2 cases of 4 ounce bottles, 4 cases of 8 ounce bottles, and 1 case of 12 ounce bottles. The following table calculates the break-even number of lotion bundles to break even and hence the number of cases of each of the three products required to break even.

Per Case Price Variable cost Contribution margin Current production

4 ounce $36.00 $13.00 $23.00 2000

8 ounce $66.00 $24.50 $41.50 4000

12 ounce $72.00 $27.00 $45.00 1000

Cases per bundle

$46.00

$166.00

$45.00

Contribution margin per bundle Fixed costs

Bundle

$257.00 $771,000

Number of bundles to break even Number of cases to break even P 2-5:

3000 6000

12000

3000

Solution to J. P. Max Department Stores (15 minutes) [Opportunity cost of retail space]

Profits after fixed cost allocations Allocated fixed costs Profits before fixed cost allocations Lease Payments Forgone Profits

Home Appliances Televisions $64,000 $82,000 7,000 8,400 71,000 90,400 72,000 86,400 – $1,000 $ 4,000

We would rent out the Home Appliance department, as lease rental receipts are more than the profits in the Home Appliance Department. On the other hand, profits generated by the Television Department are more than the lease rentals if leased out, so we continue running the TV Department. However, neither is being charged inventory holding costs, which could easily change the decision. Also, one should examine externalities. What kind of merchandise is being sold in the leased store and will this increase or decrease overall traffic and hence sales in the other departments? Chapter 2 2-2

P 2-6: a.

Solution to Vintage Cellars (15 minutes) [Average versus marginal cost] The following tabulates total, marginal and average cost. Quantity 1 2 3 4 5 6 7 8 9 10

Average Cost $12,000 10,000 8,600 7,700 7,100 7,100 7,350 7,850 8,600 9,600

Total Marginal Cost Cost $12,000 20,000 $8,000 25,800 5,800 30,800 5,000 35,500 4,700 42,600 7,100 51,450 8,850 62,800 11,350 77,400 14,600 96,000 18,600

Marginal cost intersects average cost at minimum average (MC=AC=$7,100). Or, at between 5 and 6 units AC = MC = $7,100.

At four units, the opportunity cost of producing and selling one more unit is $4,700. At four units, total cost is $30,800. At five units, total cost rises to $35,500. The incremental cost (i.e., the opportunity cost) of producing the fifth unit is $4,700.

Vintage Cellars maximizes profits ($) by producing and selling seven units. Quantity 1 2 3 4 5 6 7 8 9 10

P 2-7:

Average Cost $12,000 10,000 8,600 7,700 7,100 7,100 7,350 7,850 8,600 9,600

Total Cost $12,000 20,000 25,800 30,800 35,500 42,600 51,450 62,800 77,400 96,000

Total Revenue $9,000 18,000 27,000 36,000 45,000 54,000 63,000 72,000 81,000 90,000

cost

Profit -$3,000 -2,000 1,200 5,200 9,500 11,400 11,550 9,200 3,600 -6,000

Solution to ETB (15 minutes) [Minimizing average cost does not maximize profits]

a. The following table calculates that the average cost of the iPad bamboo case is minimized by producing 4,500 cases per month. Chapter 2 Instructor’s Manual, Accounting for Decision Making and Control

Production (units) Total cost

Monthly Production and Sales 3,000 3,500 4,500 5,000 $162,100 $163,000 $167,500 $195,000

Average cost

$54.03

$46.57

$37.22

$39.00

The following table calculates net income of the four production (sales) levels.

Production (units)

Monthly Production and Sales 3,000 3,500 4,500 5,000

Revenue Total cost Net income

$195,000 $227,500 $292,500 $325,000 162,100 163,000 167,500 195,000 $32,900 $64,500 $125,000 $130,000

Based on the above analysis, the profit maximizing production (sales) level is to manufacture and sell 5,000 iPad cases a month. Selecting the output level that minimizes average cost (4,500 cases) does not maximize profits. P 2-8: a.

Solution to Taylor Chemicals (15 minutes) [Relation between average, marginal, and total cost] Marginal cost is the cost of the next unit. So, producing two cases costs an additional $400, whereas to go from producing two cases to producing three cases costs an additional $325, and so forth. So, to compute the total cost of producing say five cases you sum the marginal costs of 1, 2, …, 5 cases and add the fixed costs ($500 + $400 + $325 + $275 + $325 + $1000 = $2825). The following table computes average and total cost given fixed cost and marginal cost.

Chapter 2 2-4

Quantity

Marginal Cost

Fixed Cost

Total Cost

Average Cost

$500

$1000

$1500

$1500.00

400

1000

1900

950.00

325

1000

2225

741.67

275

1000

2500

625.00

325

1000

2825

565.00

400

1000

3225

537.50

500

1000

3725

532.14

625

1000

4350

543.75

775

1000

5125

569.44

950

1000

6075

607.50

Average cost is minimized when seven cases are produced. At seven cases, average cost is $532.14.

Marginal cost always intersects average cost at minimum average cost. If marginal cost is above average cost, average cost is increasing. Likewise, when marginal cost is below average cost, average cost is falling. When marginal cost equals average cost, average cost is neither rising nor falling. This only occurs when average cost is at its lowest level (or at its maximum).

P 2-9:

Solution to Emrich Processing (15 minutes) [Negative opportunity costs]

Opportunity costs are usually positive. In this case, opportunity costs are negative (opportunity benefits) because the firm can avoid disposal costs if they accept the rush job. The original $1,000 price paid for GX-100 is a sunk cost. The opportunity cost of GX-100 is -$400. That is, Emrich will increase its cash flows by $400 by accepting the rush order because it will avoid having to dispose of the remaining GX-100 by paying Environ the $400 disposal fee. How to price the special order is another question. Just because the $400 disposal fee was built into the previous job does not mean it is irrelevant in pricing this job. Clearly, one factor to consider in pricing this job is the reservation price of the customer proposing the rush order. The $400 disposal fee enters the pricing decision in the following way: Emrich should be prepared to pay up to $399 less any out-of-pocket costs to get this contract.

Chapter 2 Instructor’s Manual, Accounting for Decision Making and Control